AEN: Sir John Hicks has portrayed the 1930s as a period of great intellectual battles between what he portrays as the “Hayekians” versus the budding Keynesians. What are your memories of that time?

SHACKLE:Well, I don’t think it can really be said to have started until a small group of us went down to Cambridge on a Sunday afternoon in October 1935. That's where we heard Joan Robinson and Richard Kahn and really learned about Keynes’s The General Theory. I didn’t really understand what The General Theory was going to be all about until I heard Joan Robinson. I don't think you can say that a real battle began until after The General Theory had made some impact on us in that way--perhaps not even until after it came out. But up to 1935 there was a strong Hayekian influence at the LSE--people were greatly sold on Hayek’s views as expressed in Prices and Production; I should say that included Hicks and Lerner and Kaldor.

AEN: If you go through the economics journals for the couple of years after the appearance of The General Theory in 1936 and read the reviews of the book, e.g., Hicks’s first review, Frank Knight's, Joseph Schumpeter’s, Jacob Viner’s, Dennis Robertson's, and so on down the line, every one of them criticized the book severely. And if one compiles a list of all the criticisms made in those reviews, there is very little in Keynes's arguments left unchallenged. Yet, within a few years, the book became the volume guiding economic theorists. Given the opposition to it by so many leaders in the profession, why?

SHACKLE: Well, I think the opposition was because the book’s object was to overturn the established theory of value, which it did. I think it's fair to say that the accepted, the received, theory of value and distribution in those days could not possibly account for involuntary unemployment because its premises included something very like perfect knowledge; and, if everyone had perfect knowledge, why should they have allowed a disaster like the early 1930s? It didn't make sense. The received theory of value and distribution up to the early 1930s was a theory of perfectly successful adjustment, perfect coordination. And, if things are perfectly coordinated, there's no reason why anybody should be involuntarily unemployed.

Keynes pointed out that there was this contradiction requiring an explanation and he explained it. His theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources--huge sums of money--in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.

The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation. When business is at all unsettled--when there’s any sign at all of depression--or when there’s been a lot of investment and people have run out of ideas, or when their goods are not selling quite as fast as they have been, they no longer know what the marginal value product of an extra man is—it’s non-existent. How can you say that a certain number of men have a certain marginal productivity when you can’t know what the per unit value of the goods they would produce if you employed them would sell for?
….

AEN: If one takes that position, then a question could be asked of you: Given what you have said, what should economists do?

SHACKLE: I think they should give up giving advice, except on the most hesitant, the most broad grounds. I think they should introduce an ethical element, a more than ethical element. If a man is asked whether public expenditure should be cut or not, he perhaps should say, “Well, if we cut it, we shall cause a great deal of misery; if we don’t cut it, we don’t know what the consequences will be, but we can’t at least have this misery on our consciences”. This sort of argument is not an economic argument, it’s an argument with one’s conscience.

For very many years I’ve not believed in welfare economics as a scientific construction. My idea of welfare economics is that you choose an administrator, a man with a conscience himself, and broad sympathy, with a generous mind and then you say, “Leave it to him!” I don’t believe you can do any better. Those economists who are going to give advice, or who are going to be advisors either to government or to business, should have their training based in economic history, and they only need as much theory as you find up to the second year textbook.

Even with all his sympathy with some aspects of Austrian theory, Shackle never endorsed their contemptible “do nothing” economic policy in a crisis: he remained an advocate of countercyclical Keynesian fiscal policy to the end.

The second point is that the explanation of real world business cycles involves more than just shifts in investor expectations and confidence. Keynes’s theory has been filled out and made more powerful in modern Post Keynesian theory, by incorporating Irving Fisher’s debt deflation theory and Hyman Minsky’s instability hypothesis.

Note

I am also impatiently awaiting the video/audio of the Selgin versus Skidelsky debate at the LSE. Does anyone know if this is online anywhere?

4 comments:

There are areas where legislations may be changed every six months. If that becomes a habit, businessmen grow even more nervous and realize that a new legislation could pop out of nowhere, making their current approach completely wasteful and unfeasible. Eventually, they decide to avoid investing altogether.

It seems simple enough, but I am astonished that some of the progressive advisors of Barack Obama have wrongly interpreted arguments about uncertainty and presumed bad intentions instead. They said business uncertainty is a "cose word for not allowing healthcare reform" or an evil plutocratic conspiracy to keep people poor or somesuch nonsense. Such people clearly allow rhetoric to get in the way of looking at the better side of their opponent's arguments.

I wonder - do they realize that once a brand new, untested, untried legislation is passed, it will go through several rounds of corrections, as they find some things don't work as well as they thought? Do they realize it will mean an end to investment in medical insurance and medical innovation for several years, before uncertainty climbs down?

In that sense, I have found that Democratic members of the Progressive Caucus in the United States have a far less commitment to ideas of subjectivism and uncertainty than their other counterparts. They think any radical legislation is okay, because they think immediately the "market will correct itself according to it", as Froma Harrop often likes to claim.